Dentons is aware of a number of Australian Financial Complaints Authority (AFCA) decisions where banks have been required to compensate customers who had paid money to scammers due to the transfer being initiated by an ‘ambiguous mandate’.

This has occurred when the account name of the recipient of the funds was included in the transfer instructions, but the bank did not check that the name matched the account details. The customer has then later found out that they have paid a scammer where the account number was that of the scammer, but they were given a false account name, which was, of course, not cross checked. In some instances, the banks have been required to compensate customers for amounts well into six figures.

As we all know, when transferring funds banks do not, and in fact cannot under our payment system (and are not obliged to by law), check that the account number provided matches the account name of the account receiving the funds. This is a loophole exploited by scammers who can provide unwitting victims with the scammer’s account details, but provide an account name that appears legitimate to the victim, but does not in fact match the account name of the scammer’s account.

Despite the fact that account names are disregarded by banks when transfers are made, many account transfer instructions (whether they are online or paper) ask for the account name to be provided as well as the BSB and account number. Arguably, this practice assists customers in keeping records of who they have paid. But this practice has come into question by AFCA, with the complaints authority holding that by requesting the account name, yet not using that information to ensure that the name matches the account number, a transfer may be made under an ‘ambiguous mandate’ meaning that the bank has in effect transferred their own funds and must compensate the customer.

In one published decision (686920), while AFCA acknowledged that there is no law requiring banks to warn customers that they won’t check the account name, good industry practice requires a financial firm to warn its customer, before making a payment, that:

• It will not take the account name into account in processing the payment, and will only rely on the account number and bank details; and
• That the customer should check the details provided carefully, because if the payment is paid to an incorrect recipient, it may not be possible to recover it.

Further, AFCA asserted in case number 718627 that:

"the warning must be proximate to the transaction itself, so the effect of the warning is brought home to the customer when they are making the transfer. The effect of a proximate warning is that a customer acknowledges that by proceeding with the transaction, their instruction to the bank will be based on the account number alone and will ignore the name of the intended payee. It gives the customer a chance to pause, reflect, and double check the details entered. When a customer elects to proceed with a transfer having been given such a warning, the risk of paying on an ambiguous mandate shifts from the financial firm to the customer. Absent such a warning, liability for payment on an ambiguous mandate remains with the financial firm."

We therefore recommend that all financial institutions that process payment transfers reviews their transfer instructions to ensure that they are doing enough not to be caught by decisions such as these.